"The Federal Trade Commission Settles the First Significant Antitrust Enforcement Action Brought Under Section 5 of the FTC Act in Several Decades"

On August 4, 2010, the Federal Trade Commission (FTC) announced that it entered into an agreement with Intel Corporation to resolve a much-hyped administrative complaint filed on December 16, 2009. The FTC’s complaint against Intel was filed under Section 5 of the FTC Act, shortly after the FTC touted Section 5 as a “critical tool” in antitrust enforcement despite it lying relatively dormant for nearly 30 years.1 The FTC’s complaint alleged that Intel violated Section 5 by engaging in certain acts that thwarted competition and prevented the adoption of non-Intel products in certain markets for central processing units (CPUs) and graphics processing units (GPUs). The FTC’s action follows the European Commission fining Intel approximately $1.45 billion in May of last year for similar alleged conduct (which Intel is appealing) and an action brought by rival chipmaker AMD, which ended last November with Intel agreeing to pay $1.25 billion.

In light of its statutory authority under Section 5, the FTC, unlike the European Commission and AMD, sought only to remedy the effects of Intel’s allegedly anti-competitive conduct; it did not seek to recoup losses that may have been caused by such conduct or otherwise to punish Intel with a monetary fine. Instead, the FTC’s proposed agreement with Intel (the Proposed Consent Order) seeks to restore competition in certain CPU and GPU markets and to allow for the marketplace adoption of non-Intel products through structural and injunctive relief, placing a variety of conditions on Intel’s business going forward.2 The Proposed Consent Order is subject to a 30-day comment period, which ends September 7, 2010. After the comment period, the FTC will decide whether to withdraw, modify or adopt the Proposed Consent Order.

Notably, the Proposed Consent Order was entered into after the litigation commenced. The timing demonstrates that the FTC continues to face substantial uncertainties and challenges in bringing antitrust enforcement actions under Section 5 of the FTC Act. It further demonstrates the pressures that the FTC faces in seeking structural and injunctive remedies via long, drawn-out enforcement actions in fast-paced, dynamic industries.

The FTC’s Allegations

The FTC filed its complaint on December 16, 2009, pursuant to Section 5 of the FTC Act, 15 U.S.C. Section 45. Section 5 authorizes the FTC to challenge “unfair methods of competition” and “unfair or deceptive acts or practices in or affecting commerce.”3 The FTC alleged that since 1999 Intel had engaged in a variety of “unfair methods of competition” and unfair acts or practices that allowed it to maintain its monopoly in the supply of certain CPUs and to acquire a monopoly in the supply of certain GPUs.

More specifically, the FTC alleged that Intel foreclosed competition, particularly competition from rival AMD, in the supply of x86 CPUs used in notebooks, desktops, workstations and volume servers. According to the FTC, Intel did this by (i) inducing certain original equipment manufacturers (OEMs) not to purchase and/or to limit their purchases of non-Intel CPUs by giving large rebates and lump-sum payments to OEMs that purchased CPUs mainly from Intel, (ii) threatening to increase prices, withdraw technical support and/or end joint development projects with OEMs that considered purchasing non-Intel CPUs, (iii) restricting the ability of OEMs to advertise and distribute products containing non-Intel CPUs, and (iv) failing to disclose to software developers and standards organizations changes that it made to its compilers and libraries, which led to the slower performance of products using non-Intel CPUs. The FTC further alleged that Intel slowed the adoption and marginalized the supply of GPUs that were designed to substitute for certain functionalities once supplied by x86 CPUs.

The FTC claimed that this alleged anti-competitive conduct effectively increased the prices consumers paid for products containing CPUs and GPUs and decreased the quality of such products.

The Proposed Consent Order

The Proposed Consent Order seeks to provide structural and injunctive relief for the violations alleged in the FTC’s complaint. First, it seeks to enhance the ability of Intel’s rivals, particularly AMD, NVIDIA and Via, to compete against Intel. Second, it seeks to prohibit Intel from engaging in certain acts that could prevent customers from purchasing products that use non-Intel CPUs and that could prevent suppliers from providing such products. The Proposed Consent Order does not seek to strip Intel of the market power that it has gained in x86 CPUs, nor does it propose to fine Intel for its conduct.

The Proposed Consent Order, which has a term of ten years, seeks to restore competition in the markets for CPUs and GPUs in a number of ways. For example, it requires Intel to maintain an open interface (i.e., PCI Express Bus Interface) on all of its CPU platforms for six years. It tries to encourage innovation by decreasing the risk that Intel will sue its rivals and third-party manufacturers for intellectual property violations. It contains several “commercial provisions” that prohibit Intel from engaging in certain conduct such as conditioning a benefit to OEMs in exchange for dealing exclusively with Intel. It prohibits Intel from designing its CPU and GPU products in a way that disadvantages competitive or complementary products. It also requires Intel to make accurate disclosures relating to its compilers, libraries and benchmarks.

Note on the Proposed Consent Order

This was the first significant antitrust case that the FTC has filed under Section 5 of the FTC Act in nearly thirty years, and it was filed on the heels of the FTC hosting a workshop about reviving Section 5 and stating that Section 5 is a “critical tool” in antitrust enforcement. Accordingly, it is not a surprise that the FTC sought an alternative resolution and entered into the Proposed Consent Order. The FTC likely did not want to risk receiving an unfavorable ruling in such a high-profile case, as such a ruling would quickly throw Section 5 back in the tool kit where it would yield little effect in future antitrust enforcement actions.

The Proposed Consent Order is also not surprising in light of the challenges the FTC faces in seeking structural and injunctive remedies through long, drawn-out litigation for conduct affecting fast-paced, dynamic industries. As FTC Chairman Jon Leibowitz recognized in the press release announcing the Proposed Consent Order, litigating this action to judgment could have taken years, so the Proposed Consent Order provides the FTC with a means of ensuring competition in today’s markets. If the FTC had continued to litigate this action, it ran the risk that the relevant CPU and GPU products would innovate beyond the point at which the remedial measures sought by the FTC could have a pro-competitive effect.

_______________

1 In 2008 the FTC held a workshop titled “Section 5 of the FTC Act as a Competition Statute,” at which the FTC considered views on revamping its use of Section 5 as an antitrust enforcement tool. Remarks and materials from that workshop can be found at http://www.ftc.gov/bc/workshops/section5/index.shtml.

This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.